Economic fragmentation to hurt global growth – IMF

Growing fragmentation into US-led Western and China-aligned economic blocs threatens trade cooperation and overall global growth, the International Monetary Fund (IMF) has warned.

According to IMF Deputy Managing Director Gita Gopinath, who delivered a speech at Stanford University on Tuesday, events such as the pandemic and the Ukraine conflict have hindered world trade in ways not seen since the end of the Cold War.

“Increasingly, countries around the world are guided by economic security and national security concerns in determining who they trade with and invest in,” Gopinath stated, adding that this has resulted in countries increasingly picking sides between China and the US.

While strengthening economic resilience is “not necessarily bad,” the trend of fragmentation threatens a move away from a “rules-based global trading system” and a “significant reversal of the gains from economic integration,” Gopinath cautioned.

Trade relations between the US and China have deteriorated significantly in recent years, with both sides accusing each other of escalation. Washington has been ramping up trade restrictions on China, citing national security concerns, which Beijing strongly denies. The Chinese government has also admonished the US for meddling in its domestic affairs, particularly its weapons sales to Taiwan.

According to the IMF, the growing tension between the world’s two biggest economies has been reflected globally, with over 3,000 trade restrictions imposed by countries worldwide in 2022 and 2023, more than triple compared with 2019.

China’s share of US imports plunged by 8 percentage points between 2017 and 2023, the IMF data shows, while the US’ share of China’s exports dropped by about 4 percentage points during the same period.

Trade between blocs of countries aligned with either China or the US has also been negatively affected, Gopinath said. The US bloc mainly consists of the EU, Canada, Australia and New Zealand, while China-leaning countries include Russia, Eritrea, Mali, Nicaragua and Syria, the IMF official pointed out.

The impact of the economic fragmentation is expected to be much greater than during the Cold War era due to the global economy’s higher dependence on trade, according to Gopinath.

The IMF estimated that the economic cost to global GDP could be as high as 7% in an extreme fragmentation scenario. If things play out more mildly, the hit could be as low as 0.2%.

Low-income countries are likely to be hit the hardest due to their greater reliance on agricultural imports and foreign investment from more advanced economies, the IMF concluded.